If people are hungry, provide food at prices they can afford. If they need fuel to cook it, or perhaps to bring their crops to market, give them a break at the pump. What could be fairer or more straightforward?
What, indeed. Governments all over the developing world have been seduced by the populist logic of subsidizing consumer necessities. The approach was especially alluring in centrally planned economies (including hybrids such as China and India), where prices didn't reflect costs to begin with. And, of course, subsidies for petroleum proved to be as Arab as hummus for the oil exporters of the Middle East, where citizens have come to think of fuel at circa 1979 prices as a birthright.
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If subsidies are good for the poor, why not let everybody else in on the deal? That's a formula for multiplying the waste -- subsidies reduce prices below cost, after all, artificially increasing demand and, where the subsidies are borne by the producers, undermining supply incentives. Nonetheless, extending eligibility to include both middle-class and business users has, more often than not, proved irresistible.
The catch, of course, is that few developing countries can really afford the drag on efficiency or budgetary cost. Case in point: Egypt, which devotes an astounding 10 percent of GDP to subsidies for food and fuel -- both of which it must import. Whoever wins the presidential election runoff this weekend will thus face the unenviable task of prying both the middle-class and powerful business interests from their accustomed perquisites.
It needn't (and probably shouldn't) be done overnight; among other problems, that would spike inflation, which Egypt can't afford, either. The big question is whether the new government will have the will and the way to manage it at all. Much, alas, is at stake here: Egypt's failure to confront the subsidy issue would put at risk the gains of two decades of growth in which GDP per capita, measured in terms of purchasing power, almost tripled.
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As you might have already guessed, subsidy withdrawal can be harmful to health. Back in 1977, when Egypt was effectively bankrupt, Anwar Sadat decided to let food prices rise and Egyptians took to the streets. Days of rioting and some 160 deaths later, Sadat changed his mind.
Apparently, the passage of time hasn't made the process any safer. Yemen's initiative to reduce fuel subsidies in 2005 led to riots that left dozens dead; the decision was quickly reversed. Today, Yemen's transition government must finance fuel subsidies equal to nine percent of GDP -- the highest fuel subsidy burden in the world.
It was much the same story in Nigeria, where the cash-starved government lifted fuel subsidies this past January and then quickly compromised after the announcement was countered with a general strike. The issue is far from settled, though: There are press reports that the government is so hard up for cash that it hasn't paid gasoline marketers for subsidized deliveries since the beginning of 2012.
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